WEAKNESSES

RISK ASSESSMENT

Modest rebound after two years of recession

Russian growth is expected to be positive in 2017, although weak. Activity in the hydrocarbon sector is expected to progress only slightly: at the end of 2016, production reached a record level (11.2 million bl/d), whereas the lack of investments and the maturity of numerous oil fields limit the prospects for increasing production capacities. Moreover, Russia has committed since the end of November 2016 vis-à-vis the OPEC countries to lowering its production by 300,000 bl/d until March 2018. The manufacturing sector (food processing, chemical/pharmaceutical, automobile) may benefit from a slight recovery in domestic demand. Private investment, down since 2013, showed signs of recovery during the first quarter 2017 (+2.3%). Private consumption is expected to be sustained by a slow increase in household income, linked in particular to a new and somewhat less restrictive budget policy. Real income could also continue to benefit from a slowdown in inflation.

Price increases let up sharply in early 2017 (4.1% in April), nearing the central bank’s target of 4% and allowing a softening of monetary policy (rate reduced from 11% to 9% between May 2016 and June 2017). The relative stability of the rouble should make it possible to keep inflation at a moderate level.

In the absence of real progress in the conflict in the east of Ukraine, the economic sanctions targeting trade and access of Russia to financing imposed by the EU have been maintained until 31 July 2017. The possibility of an easing or a lifting of the sanctions applied by the United States, entertained for a short time after the arrival of Donald Trump at the White House, seems to have receded. The country’s access to international financing will thus remain limited, restricting the rebound of growth.

Improvement in the fiscal and current account balance

Fiscal income is projected to rise in 2017 thanks to changes in taxation of the hydrocarbon sector and the profits of public-sector companies. The moderate rise in oil prices will thus boost State revenues. Further privatisations (VTB Bank and the shipping firm, Sovcomflot, in particular), after those of Alrosa, Bashneft and Rosneft in 2016, will also contribute to the improvement of the public finances. The 2017 draft budget includes an increase in social spending, offset by cuts to other items. The aim is to gradually bring down the deficit, while sustaining demand in the run up to the presidential elections in 2018 without fuelling inflation.

The current account surplus is expected to increase due to a rise in hydrocarbon exports (about 2/3 of total exports), which however is likely to be modest due to the absence of high increase in prices and to the commitment to reduce production. The upturn in domestic demand, even though it is moderate, could however be reflected in higher imports, limiting the improvement in the current account balance.

The rate of the rouble, sustained by a price for petroleum higher than in 2016 and by fairly attractive yields (carry trade), is not expected to rise sharply in 2017. The authorities have launched a program for purchasing currencies in order to reconstitute the reserves and limit the rise of the rouble which, in national currency, reduces budget receipts from the petroleum sector. An increase in the dollar, a new decrease in the price of petroleum or capital outflows (an increase of nearly $10 billion in maturities of foreign debt in 2017) would weigh on the rouble.

The situation in the banking sector appears to be stabilising as a result of the measures taken in the sector by the central bank which led to the closing of 130 establishments between January 2016 and the end of April 2017.

Political situation expected to remain stable and business climate still poor

The crisis in Ukraine played a unifying role among the Russian population and has reinforced Vladimir Putin's popularity. The September 2016 parliamentary elections confirmed the dominance of President Putin's United Russia Party (54% of the votes cast), but on a low turnout (48% compared with 60% in 2011). Dissatisfaction exists, as shown by the demonstrations in March and June 2017, but State control of the media and the internet considerably limits the ability of opposition movements to organise and express themselves. A. Navalny, an anti-corruption militant who appeared to be a figure able to incarnate the various opposition movements, is now involved in a number of legal proceedings and will not be able to stand for the presidential elections in March 2018.

Governance shortcomings and the lack of corporate transparency strongly weaken the business climate. Russia has been downgraded on most of the World Bank's indicators, especially regarding regulatory quality and has made no progress on the fight against corruption.